(2) Public Corporations

Shareholder Proposals: Rule 14a-8

(1) Company gets proposals to amend bylaws from shareholders (2) If company wants to exlcude have to ask SEC for "no action" letter (3) Most shareholder proposals relate to socially significant issues or corporate governance

Presence of markets means public corporations are regulated by different laws:

(1) DGCL (2) Federal Securities Law (3) NYSE Listed company manual

Proxy Regulation

(1) Federal law regulates the proxy process for public companies (2) If shareholder is solicited for his proxy, the solicitor must provide a lengthy disclosure statement with proxy card (3) Every year public companies send out proxy materials to their shareholders

To exclude s/hd proposal under 14a-8, proposal must be:

(1) Improper under state law (2) Economically irrelevant (3) Ordinary Business Operations (4) Exception to exclusion is if is a matter of social significance.

To be listed on securities exchange must meet certain eligibility requirements, NYSE Listed Company Manual. If accepted, subject to the following "listing standards"

(1) Must have a majority of independent directors. § 303A.01 (2) Must have an audit committee. § 303A.06 (3) Shareholder voting rights on equity compensation plans. § 303A.08

Characteristics of public corporations

(1) Presence of market (2) Large number of shareholders (3) Dominance of institutional investors (4) Federal regulation (5) Governance of public corporation

Securities Exchange Act of 1934

(1) Regulates use of proxy (2) Requires companies to issue "periodic reports" (a) Person on a resale market needs the same info that someone does when buying stock directly from the corporation ('33 Act disclosure document) (b) Purpose: protect vulnerable parties (3) Regulates fraud, insider trading, market manipulation

Proxy Access

(1) shareholders can include request on company's proxy card - another way to use proposal process to increase shareholder power. (2) Different from shareholder requests which are substantive changes. SH proposals can include specific names of nominees to elect to the board (3) Benefits: cheaper and more accessible process for shareholder nominations. They can nominate a certain number of directors, typically three. So instead of 9 company-nominated directors, there'd be 12, 3 shareholder-nominated. (4) Dangers: pits the board against shareholders & shareholder-nominated directors. (5) Proxy access can be done though private ordering

Proxy Advisory Firms

Advise shareholders on how to vote and specifically advise institutional shareholders (who pay them for advice) → significant power in whether shareholder proposal is adopted. Two biggest proxy advisory firms are "Institutional Shareholder Services (ISS) and Glass Lewis."

Using the shareholder proposal process to amend bylaws can raise §141 issues, intruding on board power to manage corporation. Is majority voting ok under §141?

Majority voting is merely regulating the procedure for electing directors, so permissible shareholder recommendation.

Cracker Barrel Case

Proposal was about implementation of non-discriminatory policies relating to sexual orientation for employment. Because proposal says "shareholders request" this is a non-binding proposal which allows board to say yes or no. If you phrase it as a "request" almost always proper and cannot be excluded (14a-8(i)note). Paragraph (7) allows exclusion if it relates to "ordinary business." Firing someone for sexual orientation is not "ordinary" it is a matter of social significance. If employment issue tied to social issue then the matter isn't ordinary (Take-away Rule). Exclusion under Paragraph (5): less than 5% of company then allowed to exclude

Lovenheim v. Irquois

Seems like should have been excluded because less than 5% BUT could not be excluded because the mistreatment of animals to make paté is a matter of social significance. Court looked at language of paragraph (5) "and is not otherwise significantly related to the company's business." RULE: matters of social significance are always related to the business.

De-staggering the board

Staggered board provisions are in the C/I. Two steps to change: (1) board must agree to do it (2) board submits for shareholder vote. Difficult to get board to agree.

Kistefos AS v. Trico Marine:

The issue is what happens if a director doesn't get a majority vote → failed election. DGCL 141(b) says that each officer shall hold office until their successor is "elected" & qualified or until such director's earlier resignation or removal → holdover director. Π submits proposal to change this to director's position "immediately expires." ∆ rejected/excluded proposal on grounds it violates DGCL. π wants expedited meeting to vote ordered by court. Court says no ∆ grounds for denial is legally preserved and the stockholders can vote on this proposal at next annual meeting. When considering expedited a meeting you look to see if there is sufficient evidence that not doing so would cause irreparable injury and that is not the case here.

What happens if the board continues to ignore shareholder requests?

The only way to make it binding is to make a bylaw amendment. Directors must abide by bylaws. Example: Example: DGCL default rule is plurality voting. Shareholders can change it to majority voting by amending the bylaws (requires majority vote). DGCL 216(1). Note - this is only if plurality voting is in bylaws, not C/I. Boards are shifting over to majority voting b/c of pressure by institutional investors.

Most public companies today adopt "Pfizer Rule"

if director gets less than majority vote then director is required to resign to the board and then the board has complete discretion to accept or reject resignation (and always reject it).

Today most public company stock is owned by:

institutional investors

Proxy voting

shareholder delegates his voting power to a representative, so he doesn't have to attend the annual meeting in order to vote. Note: in Delaware, presence is established by person or by proxy.

Activist Shareholders

use shareholder proposals to encourage management to be more accountable to shareholders.

Because you have institutional investors the model has changed from rational apathy →

"activist shareholders" (1) Actively participate in voting, conversations with management to change what the company is doing. (2) Focused on return on investment (3) Can lead to proxy fights

Benefits of being listed on securities exchange

(1) Can easily sell stock (2) people will pay more for stock knowing that there is a market

Shareholder proposals are are normally framed as ________ so they're not deemed "improper under state law" §14a8(i)

requests/recommendations